Magazine

So Much for Invincible Silicon Europe

July 08, 2001

For a while, it looked like Silicon Europe might be spared the carnage in Silicon Valley. Even as U.S. chipmakers reported harrowing declines of up to 50% in first-quarter sales, Europe's Big Three--Infineon Technologies (IFX), Royal Philips Electronics, and STMicroelectronics (STM)--stayed mostly in positive territory. Their share prices outperformed those of U.S. counterparts, too. With solid domestic markets and less exposure to the ailing PC market, the Continent's top chipmakers looked better-positioned to weather the tech downturn.

Now they've come crashing to earth. With growing signs of a European economic slowdown, the Big Three can no longer count on strong regional business to counteract weakness elsewhere. What's worse, the tech chill has spread beyond PCs into the wireless sector, which gobbles up a third of Europe's chip output. The ugly truth hit home on June 12, when Finland's mobile-phone giant, Nokia Corp. (NOK), stunned the markets with predictions of sharply lower sales. In quick succession, STM, Philips, and Infineon all announced sharply lower forecasts for this quarter and year. Investors ran for the exits, whacking $16 billion from the Big Three's combined market capitalization.

Is the dream of a vibrant European chip sector dead? Not quite. Despite the downward lurch in sales projections, analysts still figure Europe's big chipmakers won't fare as badly as their American rivals. All three sell products to a wide range of markets, which helps protect them from a meltdown in any one sector. Plus, a quarter or more of their sales go to industries such as automotive and consumer electronics that are far less volatile than the PC and telecom businesses. "The highs aren't as high, but the lows aren't as low," says chip analyst Scott Randall of brokerage Wit SoundView Group Inc. in Stamford, Conn.

That formula should minimize the pain. In fact, Geneva's STM may walk away this year with the title of best-performing large chipmaker globally. Under CEO Pasquale Pistorio, STM has grown into the world's sixth-largest chip company on the strength of its tight customer relationships and diverse product portfolio. Analysts figure sales will fall 15% this year, to $6.7 billion, and that earnings will drop 50%, to $686 million. As bad as that sounds, it's far better than the $108 million loss expected at U.S. rival National Semiconductor. "This reinforces our conviction that we're doing the right thing," says Alain Dutheil, STM's vice-president for strategic planning. To be on the safe side, though, STM is cutting capital spending, travel, and bonuses.

STAYING THE COURSE. Infineon is less fortunate but certainly not on the endangered list. It makes chips for the communications industry and is the sole remaining European maker of dynamic random-access memory (DRAM) chips, which are used heavily in PCs. Now, with weak telecom demand and a global DRAM glut driving down memory-chip prices, Infineon is projected to lose $269 million this year. Yet CEO Ulrich Schumacher says he has no intention of fleeing the DRAM business, which yields huge profits in the good times. Instead, Infineon plans to sell off two small divisions that make optical components and will cut capital spending. Analysts project that it will be back in the black by 2002.

At Philips' chipmaking operation, weakness in its two largest markets, communications and consumer electronics, is pummeling 2001 sales. To work down inventories, the company is now running its chip plants at just 45% of capacity. "We're taking actions to protect ourselves as much as possible," says Philips CFO Jan Hommen.

High-tech malaise has swept Europe, but its top chipmakers aren't hitting the panic button. None of the three is bailing out of major businesses or cutting back on research and development spending. They're hurting, but they're definitely still in the game. By Andy Reinhardt in Paris